Nonalcoholic fatty liver disease (NAFLD) is a chronic, progressive liver disease that affects 30% of all US adults. NAFLD is strongly linked to type 2 diabetes, with an estimated 80% of type 2 diabetics having NAFLD. Unfortunately, the Veteran population has a significantly higher prevalence of diabetes than the general population (20-25% vs. 6-8%), and, therefore, it would be expected to have a similarly higher prevalence of NAFLD. Because NAFLD leads to a significant number of patients with cirrhosis and need for liver transplantation, this condition is an important issue for the VA healthcare system. Despite the strong association between NAFLD and type 2 diabetes, a unifying pathophysiology remains poorly understood. The overall hypothesis of this proposal is that hepatic lipid intermediate/metabolite accumulation and hepatic insulin resistance develops due to hepatic mitochondrial dysfunction, which leads to dysregulated hepatic glucose output and ultimately development of type 2 diabetes. In addition, targeting hepatic mitochondrial dysfunction and hepatic insulin resistance with lifestyle modifications and/or pharmacological interventions will effectively treat NAFLD and type 2 diabetes. We will conduct studies in the Otsuka Long-Evans Tokushima Fatty (OLETF) rat, a well characterized rodent model of hyperphagia-induced obesity, NAFLD, and type 2 diabetes to examine the following specific aims. 1) Determine whether hepatic insulin resistance associated with NAFLD develops secondary to mitochondrial dysfunction and is a significant contributing factor in the development of type 2 diabetes. 2) Determine the effectiveness of daily exercise vs. caloric restriction (with and without metformin) in the treatment of NAFLD and type 2 diabetes. For Aim 1, OLETF rats will be studied at different ages throughout the spectrum of pre-insulin resistance, insulin resistance, and development of frank type 2 diabetes. For Aim 2, OLETF rats will be treated with exercise, caloric restriction, metformin, or combination therapies. The studies will employ in-vivo hyperinsulinemic-euglycemic clamps to assess systemic and hepatic insulin sensitivity and thorough examinations of hepatic mitochondrial function/content and lipid intermediate/metabolites accumulation. This project is extremely novel as it will examine the role of hepatic mitochondrial dysfunction and hepatic insulin resistance throughout the initiation, development, and progression of systemic insulin resistance and type 2 diabetes. In addition, it will comprehensively examine the effectiveness of lifestyle modifications and pharmacological interventions in the treatment of NAFLD and type 2 diabetes. These studies will provide future insight into reducing the incidence of type 2 diabetes and NAFLD in our Veteran population.